By: Mark Fitzgerald And Jennifer Saba
For all the reversal of fortune newspapers have endured over the past half-century ? the disappearance of afternoon papers from big cities, diminished household penetration and accelerated loss of young readers with each new generation ? bankruptcy remained something that was merely covered in their business pages. It was something that happened to someone else. Sure, newspapers might disappear, but their corporate parents almost never went bankrupt.
But now, an unprecedented number of newspaper companies are turning the page to Chapter 11. The parents of two dailies fighting one of the last newspaper wars in America, in Chicago ? Tribune Co. and Sun-Times Media Group ? are both in bankruptcy. So are Journal Register Co. and the parents of The Philadelphia Inquirer and the Star Tribune in Minneapolis. Also in bankruptcy is Creative Loafing, the second-largest publisher of alternative weeklies ? a category once thought immune to the ills of the dailies in the urban markets they serve.
“This is different for the newspaper business,” says analyst John Morton, who has been entrenched in the industry for decades. Mike Simonton, senior director of media and entertainment at credit rating agency Fitch Ratings, concurs: “Bankruptcies in this volume and frequency are unprecedented.”
And more filings are coming, Simonton and other analysts believe. Other companies are, as they say, “exploring” it.
One chain often mentioned as a candidate for bankruptcy is Augusta, Ga.-based Morris Publishing Group, the owner of The Florida Times-Union in Jacksonville and a dozen other dailies. As this issue was going to press, Morris was nearing the end of yet another waiver period in which its lenders gave it more time to come up with an interest payment that was due in early February.
Morris is struggling under $413 million in debt, and in April its auditors said in the company’s annual report that there are doubts it could continue as a going concern. Morris has hired restructuring specialists Lazard Freres & Co. ? the same firm Tribune hired before it declared bankruptcy ? and a law firm with a strong bankruptcy practice. (Morris officials didn’t respond to E&P’s inquiries for comment.)
Lee Enterprises and The McClatchy Co. are two chains Morningstar equity analyst Tom Corbett considers possible bankruptcy candidates because of their high debt and anticipated continued revenue decline. Lee’s balance sheet “is suffocating under a smothering amount of debt,” Corbett says, adding that McClatchy is “barely treading water.” Yet both continue to generate substantial cash flow, and McClatchy in particular does not have any significant debt coming mature for the next two years. McClatchy Treasurer Elaine Lintecum declined to comment for this story.
Lee spokesman Dan Hayes says the company’s refinancing agreements reached in February included chopping by more than half a $306 million payment due this year on debt from its Pulitzer acquisition, significantly reducing principal payments on its credit agreement for three years. That, he adds, gives the company “a clear runway to manage through the recession.”
The uncertainties of the newspaper industry and the media business in general, however, contribute to a feeling of near helplessness among even the savviest executives, says Rich Nejame, a managing director with a specialty in restructuring at the investment bank Broadpoint Securities Group. “I talk to so many guys in the media business, and they just see it as a falling knife,” he says. “They don’t know where it’s going to go, or how it’s going to sort itself out.”
Those looking on the bright side of bankruptcy often note that businesses in some troubled industries emerged from Chapter 11 much better for it. Airlines such as United, for instance, rationalized their routes, shed excess airport gates, and combined with regional competitors while they were under bankruptcy protection. But experts warn that newspapers may not be the kind of industry that can benefit from bankruptcy in the same manner.
Not just the economy
So what accounts for the lines at Bankruptcy Court these days? Clearly newspapers are not alone in turning to Chapter 11. Nearly 6,000 bankruptcy petitions were filed in March alone ? up 38% from a year ago and about 80% from 2007, according to Automated Access to Court Electronic Records, a bankruptcy data company. But analysts say the industry is suffering not so much due to the miserable economy as it is from the poor business decisions newspapers have made in recent years.
“Most of the problems [have arisen] because the economy makes the positions owners and managers put themselves in untenable,” says media economist Robert G. Picard. “But it was the business decisions that brought them to bankruptcy. The economic times were just enough to push them over the brink.”
In at least one case, it’s also a matter of repeating the same mistake. Journal Register Co., publisher of The New Haven Register and 19 other dailies, emerged from the wreckage of the community newspaper empire Ralph Ingersoll II created in the 1980s using the then-novel technique of junk bond financing. “When he couldn’t meet his obligations, his creditors took over control of it and turned it into what is ultimately Journal Register,” recalls analyst Morton. “Following in a certain pattern, they borrowed a lot of money for acquisitions, particularly a big acquisition in Michigan. We know what the story is there ? they couldn’t meet their obligations.”
But Morton and Picard both note that most of the newspapers published by bankrupt companies are actually turning operating profits. What’s killing their parent corporations are huge debt burdens.
Tribune Co., reeling under more than $12 billion in debt, is one extreme example. Tribune borrowed some $8.2 billion to complete Sam Zell’s going- private transaction in December 2007. In less than a year, Tribune chose bankruptcy protection over paying out more of its dwindling cash to stay current on the loans.
Bankruptcies are like snowflakes ? each one is different, says Robert Lawless, a professor of law at the University of Illinois at Urbana-Champaign. But the newspaper cases he’s seen filed so far illustrate some common patterns.
Journal Register, with a relatively small number of creditors, devised a so-called “prepackaged bankruptcy” plan with its biggest creditors to work its way out from under $692 million in debt that exceeds its $596 million in assets. The creditors agreed to its plan to cancel its stock and become a closely held company controlled by its lenders. Prepackaged bankruptcy cases “tend to go more quickly and cost much less,” says Lawless.
The case filed by the parent of The Philadelphia Inquirer and Philadelphia Daily News is more common among businesses in general, and certainly among the newspapers now in Bankruptcy Court. It could not work out a deal with its creditors in advance.
Last November, Philadelphia Newspapers LLC proposed that its investors put up $20 million in new equity in exchange for equity interest in the new restructured enterprise in mid-November. That plan was rejected, and instead some of the backers sought to come up with their own strategy. They presented the proposal to the debtors at the end of January. Ultimately, the newspapers went into bankruptcy court on Feb. 22 without an agreed-upon plan.
The first thing that happens after a Chapter 11 filing is an “automatic stay,” Lawless explains. All attempts to collect debt, or change the terms of contracts are halted. This happens the moment the petition ? stamped with the exact minute ? is filed. “At that exact moment, everything stops,” Lawless adds. “Bankruptcy preserves the status quo.”
Once a parent corporation files for bankruptcy, all the payments owed by individual newspapers before the petition was filed are stopped, with the bills to be sorted out by the creditors committee. A new “post-petition” list of vendors is then approved, and those are paid on an ongoing basis.
Bankruptcy courts also issue so-called “first-day orders,” usually approving some spending by the newspaper to keep operations going. In Philadelphia Newspapers’ case, the debtors documented exactly the cash necessary for conducting business on a day-to-day basis such as paying employees and keeping health benefits intact. It asked the court permission to tap cash collateral in order to pay insurance, wages, rent, utilities charges, and “other critical operating expenses.”
For example, the company’s obligations to its 4,619 employees include gross payroll expenses of “approximately $10,800,000 per month.” In another example, the company petitions the court to allow the continuation of circulation incentive programs “in order to increase current circulation levels and increase revenue.” On the benefits front, Philadelphia Newspapers provides medical insurance for approximately 438 non-unionized regular employees alone, which costs $298,000 per month. It spends an average of $625,000 per month on utilities.
The court may also authorize “debtor in possession” (DIP) financing on an interim basis.
DIP is a cash lifeline ? essentially another line of credit for the newspaper. Why would anyone lend to a bankrupt company? Because DIP is very secure, and lucrative, for lenders, Lawless notes: “There is no other form of lending where you get a federal court to sign off on an order saying you have priority” in repayment. “The DIP gets paid before the other creditors.”
In Philadelphia, the newspapers continue a public battle with the senior lenders, led by Citizens Bank, who are owed some $300 million used to partly finance the $515 million purchase of these old Knight Ridder papers from The McClatchy Co. in 2006. The talks have been rancorous, with Philadelphia Newspapers saying a business meeting with one of its senior lenders was secretly taped by the creditors. It wants a special counsel to investigate the alleged bugging.
The lenders asked the U.S. Bankruptcy Court in Philadelphia to give them control of the papers through a “chief restructuring officer” who would have executive power. They later dropped that demand. As this issue went to press, Philadelphia Newspapers offered the major creditors $50 million to bring the company out of bankruptcy, which would represent a major loss on their investment.
Publisher Brian Tierney and other executives in the group that bought the papers have lobbied for employee support of their plan by warning, among other things, that the bankers might close the Daily News if they won control.
The Philadelphia story illustrates the back-and-forth of the bankruptcy process, which includes vendors and creditors jockeying for position before the court. For example, bankruptcy nullifies burdensome contracts, says Lawless, with the exception of collective bargaining agreements. “From an employment contract to a lease and the company that supplies you ink, if you get a better deal, you can take it,” he adds.
Ben Eason, CEO of alt-publisher Creative Loafing who is experiencing the process of bankruptcy first-hand, explains that management has to file a plan to go forward. “One of your creditors has to [approve your plan],” he says. “You put it before the judge and then you argue about it, and then the judge either accepts the plan based on certain points or the judge may say your plan fails to meet certain requirements go back to the drawing board, or ‘nice try.’ It’s a very free-flowing kind of thing. All these checks and balances.”
Bankruptcy can bring unexpected ?and frustrating ? complications for newspaper managers in departments ranging from classified order-taking to the newsroom.
It can cause budgetary havoc at the newsroom level, says one editor at a major metro who insisted on anonymity because individual newspaper managers are not authorized by the corporate parent to comment on its bankruptcy.
“Where it gets complicated is when you have someone who does polling for you, or for paying for records from the courthouse, or a freelancer,” the editor says. “Especially those people who aren’t owed a lot of money, like a freelancer, when you say you want them to do a piece, they’re going to tell you, ‘Kiss my ass ? you owe me $1,500, and I’m not working for you until I get my money.'”
Managers have been sternly warned against cutting any special deals with those who are owed money, the editor says: “It leads to complicated financial protocols that can be very frustrating, but you’ve got to follow the rules, because God forbid if you get caught giving special treatment to a creditor.”
The usual critics of a local paper will also use a bankruptcy “as if it were a real blight on your reputation,” the editor says. On the other hand, he adds, the paper continues to do good work: “It has not stopped our newsroom from kicking ass and taking names.”
So is bankruptcy worth it? Will it save these papers and help them back to health? Nobody is ever happy filing for Chapter 11, and the process is far from painless. But there are some advantages, especially for indebted newspapers.
“Bankruptcy allows them to reduce leverage significantly,” says John Puchalla, a vice president and senior analyst at the big credit rating agency Moody’s Ratings Services. “It doesn’t alleviate pressure on the business, but allows them to take a bit of a longer-term view. If they respond by cutting the newsroom, that can adversely affect the business, long term. On the flip side, it does put a lot of pressure on companies to deal with structural costs and forces them to be more aggressive on that front.”
If bankruptcy is the “first step toward getting more sustainable capital structures” ? that is, getting debt and revenue back into greater balance ? it might make sense for newspapers, adds Fitch’s Mike Simonton. Newspapers, he believes, might as well bow to the inevitable and take the step.
Jeremy Halbreich didn’t want to think of bankruptcy as inevitable when he began as interim CEO of Sun-Times Media Group (STMG) following a shareholder’s revolt that ousted nearly all directors and Cyrus Freidheim, the turnaround specialist who ran out of time trying to right the Chicago Sun-Times’ parent.
But he’s also come to think bankruptcy is the only solution for its survival.
The new board met Feb. 10 and began a rigorous evaluation of the company’s financial situation. Sun-Times is an anomaly among the other newspaper companies in bankruptcy now because it has no bank or bond debt. What it does have is a legacy of years of what an internal investigation called a “corporate kleptocracy” under its now-jailed chairman, Conrad Black. It also had big tax bills from the U.S. and Canada related to the fraud, a circulation scandal that drained cash to make good on defrauded advertisers ? and all the problems that come with being the second newspaper in a big city.
STMG’s condition was serious. Unlike debt-ridden companies with cash-flow-positive newspapers, Sun-Times papers were losing money. The company was burning through its cash reserve at a rate of $14 million a quarter ? and the losses were accelerating. “There’s a period of time reasonably well before you actually file for bankruptcy when you realize that depending on circumstances and how business is going, it may be a reality,” Halbreich says.
Through 2008, previous management had tried to sell all or parts of the company, and had some positive feelers, notes Halbreich. But a $600 million tax claim by the IRS stopped them cold. “Everybody at the end of the day said, we just don’t feel comfortable putting money into a company that has these kind of legacy liabilities,” he says.
Unlike other creditors, the IRS doesn’t negotiate down just because of bankruptcy. But a so-called Section 363 sale allows companies to sell assets without liabilities, such as the tax claim.
Here’s how it works: STMG would sell itself to a buyer, who would then create a new company. Money from that sale would go to Sun-Times, which, under the auspices of Bankruptcy Court, would pay off its debt, including the taxman waiting at the head of the line. “We are fully confident we can attract new capital, set all liabilities aside and move forward,” adds Halbreich, who predicts STMG will be out of bankruptcy well before year’s end.
Half a loaf
Creative Loafing CEO Eason says bankruptcy has offered his company ? which came to realize the debt taken on to buy the Chicago Reader and its sibling publications was too much after the real estate collapse in 2007 ? the opportunity to speed its transformation to digital publishing, and to cut its costs.
Eason explains that Chapter 11 allows his company to take advantage of dramatically reduced costs tied to legacy contracts and “outdated” processes. As such, he can have his employees spend 90% of their energy presenting content online and selling bundled offerings to advertisers, and the other 10% on the print product. “Everyone in the business knows print pays the bills, but most folks don’t understand that digital contributes to the profits,” he says. In a pre-Chapter 11 company, “the profit expectation baked into the capital structure is entirely based on maintenance of historical print profit margins.”
And when Creative Loafing emerges from bankruptcy, which Eason expects will happen this summer, everyone will know the company’s real worth, he adds: “As time goes on, people are more realistic in what the company can produce going forward. We have an opportunity. It’s an opportunity to suggest to the creditors, to the judge, to everybody involved what we believe the company will look like going forward and then we have the opportunity to suggest what the capital structure is going to be. We are forced to value the company, not as we would like it to be, or what it was, but what it is today.”
On the other hand, newspapers may not like what the judge decides about their value, warns Fitch Ratings’ Simonton. “There is always the risk the court may decide these are unsustainable entities, and there is more value in closing them,” he says, adding that bankruptcy can be an enormous management distraction at exactly the time newspapers can least afford to take their eyes off the ball.
Creative Loafing illustrates some of that potential peril. Eason endured days of hearings in March on creditor Atalaya Capital Management’s unsuccessful attempt to remove him from control of the chain.
Bankruptcy can actually delay needed innovations, argues Morningstar analyst Tom Corbett: “If most of your cash flow is going to pay creditors, what does it say about what you are doing to invest in your business and reinvent your product? It’s not unlike someone going under the knife to remove a kidney to pay their rent. It becomes expensive even to stand still.”
What bankruptcy can’t do
Bankruptcy “is a tool to deal with financial distress,” says law professor Lawless. “It does not fix the economic distress, which is a fundamental problem in the business. Bankruptcy couldn’t do anything for a typewriter manufacturer these days.”
Indeed, the question for bankruptcy courts is whether newspapers are more like viable information businesses ? or typewriter makers.
Credit analysts Puchalla of Moody’s Ratings Services and Simonton of Fitch say newspapers’ biggest problem is that they contribute to the oversupply of advertising venues that’s been further inflated by the Web. In classic economics, the weakest players will go away to balance supply and demand. Newspapers with higher debt loads than other media and weakening margins may be the logical candidates to exit the market.
In the past, Simonton notes, a failing newspaper would be scooped up by better-capitalized companies, or by a rival who would fold it to end competition. But the slow, nearly nonexistent, market for metro dailies shows that option has essentially disappeared.
Bankrupt newspapers and their parents are the newest canaries in the industry coal mine because seeking shelter under bankruptcy exposes the deteriorating underside of the business. Creative Loafing’s Eason finds that liberating in a way.
“Bankruptcy,” he says, is a “recognition that all the contracts the business had, all of its lender and trade creditors, failed.” The old business models are done, broken, and must be replaced by a strategy based on the realistic value of the company.
“If the judge has done her duty, she won’t let it come out of Chapter 11 without a decent fighting chance for its future,” Eason says of Creative Loafing. But make no mistake, he adds, bankruptcy can be a brutal process. “All the rules of Chapter 11 are intended to accentuate everybody’s economic interests,” he adds. “It’s capitalism at its rawest form.”